Cash-out refinancing is a way of accessing home equity by taking out a new mortgage with a larger principal than the current one. The difference in principal in the two mortgages is available to you to use as cash for almost any purpose you choose.
You can use cash-out refinancing to obtain a new mortgage with a higher principal than what you owe. Let’s suppose your home is worth $200,000, and you owe $100,000 in principal. Your equity is $100,000. If you have a $50,000 balance on a credit card that carries an 18 percent interest rate, you can refinance to a mortgage with a principal of $150,000 and receive the difference between your old principal and your new one in cash. In this case, the amount would be $50,000. You may then use that money to pay off your credit card.
Once this is done, you will no longer have credit card debt and, therefore, will have no monthly credit card payment. You will also have a better interest rate on your debt, so you will save quite a bit in interest each month. Even though you may pay more in your mortgage payment, you will be out of credit card debt, so you will have more money free each month.
To use cash-out refinancing you should:
- Assess your debt load.
- Talk with a lender about using cash-out refinancing.
- Apply for the loan, go to closing and pay off your credit cards with the cash-out refinancing.
- Save money each month by paying less in interest.
- Control your spending.
The key to using cash-out refinancing is to be sure that you curtail your spending. If you use this strategy, but go back to your old spending habits, then you will have made a mistake. Not only will you have increased your mortgage, but you will have high interest credit card debt again. You can easily dig yourself back into the same hole, but this time you will not have the option of using your home equity to help yourself out. Also, remember that the loan is secured to your home with cash-out refinancing. That means you can lose your house if you default on the loan.
If you do use restraint with your spending, however, then cash-out refinancing can be a wise way to consolidate your debt. It can cut back your monthly debt expenses and allow you to pay off your high interest loans with a lower interest rate mortgage. Be sure to carefully consider whether cash-out refinancing is a good option for you before making your decision.
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